This transition is affecting farm cultural practices and 

 fertilizer usage It also promises to hasten the transi- 

 tion of some areas of irrigated agriculture to a less 

 intensive type of production. 



THE FINANCIAL ISSUES 



A number of financial issues are important to US 

 and to western agriculture. 



Cost of Money 



Foremost among issues in many farmers' minds is 

 the cost of money. Interest rates, high as a result of 

 macroeconomic policies to reduce inflation, have not 

 yet declined as inflation has declined. It seems likely 

 that financial market fears over prospective federal 

 budget deficits have played an important role in hold- 

 ing the prime rate far above the current rate of infla- 

 tion If the fiscal policy dilemma is resolved and the 

 pattern of prospective deficits turned decisively down- 

 ward, interest rates could decline significantly With- 

 out a satisfactory resolution, the rates may remain 

 high by historical standards 



For farmers, increases in the cost of money have 

 been particularly unsettling. In the past, agricultural 

 banks typically generated loanable funds and wrote 

 loans within a local market. Thus, farmers tended to 

 be partially protected from fluctuations in national 

 money market interest rates With the passage of the 

 Monetary Control Act of 1980, and the introduction of 

 new market instruments, agricultural and other com- 

 munity banks were quickly drawn into the nation's 

 broader financial markets. As a consequence, farmers 

 now pay market rates for loan funds and receive mar- 

 ket rates on savings. 



Competition for Loan Funds 



The integration of agricultural banks into national 

 financial markets, along with the outstanding success 

 of the Farm Credit Banks in raising loan funds in 

 national markets, has assured farmers of access to 

 credit when needed — providing the loan request is 

 credit worthy However, competition in national mar- 

 kets and the deterioration of long-term capital mar- 

 kets — a consequence of rapid price inflation — 

 have raised the cost for loan funds Thus, large 

 investments requiring a great deal of debt capital, such 

 as land purchases, irrigation development, 

 infra-structure investment, etc., will come under 

 greater scrutiny by both borrowers and lenders. 



Table 1 



Farm Real Estate Values 



April 1, 1982 



(Average Value Per Acre by Reporting Banks) 



Nonirrigated Irrigated Ranchland 



'Colorado. Wyoming, and New Mexico combined 

 Source: Federal Reserve Bank of Kansas City 



Continued large federal government deficits will, of 

 course, add to the competition for loan funds and to 

 the prices paid for those funds. 



Volatility of Interest Rates 



Farmers and nonfarm businessmen, alike, have 

 found the recent volatility in interest rates unsettling. 

 While greater volatility is a consequence of current 

 Federal Reserve procedures for implementing mone- 

 tary policy, the amplitude of that volatility will likely 

 subside as inflation declines, as uncertainty about the 

 direction of macroeconomic policy is reduced, as mar- 

 ket participants better understand Federal Reserve 

 goals and procedures, and as deregulation of financial 

 institutions is completed 



Nonetheless, rates will likely continue more volatile 

 than prior to 1979. A measure of that volatility for 

 agricultural loans is found in Chart 2. To better man- 

 age volatility, both borrowers and lenders may turn to 

 financial futures markets to fix their cost of loan funds. 



61 



